Federal Carbon Tax: What Impacts for Quebec?

December 3, 2018

Introduction

On June 21, 2018 the federal Greenhouse Gas Pollution Pricing Act (the “GGPPA”), published pursuant to Part 5 of the Budget Implementation Act 2018, received royal assent and established the federal standard for a compliant carbon pricing regime. The purpose of the GGPPA is to incentivize greenhouse gas emissions regulation broadly throughout Canada, notably considering the different policy initiatives in this regard across the country. The GGPPA will be implemented in those provinces or territories that either request the federal system or do not have a legislative scheme in place which the federal government deems compliant with the federal standard.

On October 23, 2018 the federal government released draft regulatory proposals listing Ontario, New Brunswick, Manitoba, and Saskatchewan as provinces that will be subject to the federal system in 2019 and announced that Yukon and Nunavut would voluntarily participate (collectively the “Listed Provinces”). Prince Edward Island will also partially be subjected to the GGPA.

Despite the fact that Quebec does not currently fall under the scope of the GGPPA, businesses that are involved in transporting fuel may be indirectly affected when doing business in any of the Listed Provinces. In this bulletin, we will address the general implications of the GGPPA, as well as certain indirect effects it may have on Quebec industry.

The GGPA consists of two main features: (i) part one consists of a carbon tax on fossil fuels which will enter into force in some Listed Provinces in April and others in July 2019; and (ii) part two consists of an output-based pricing system (“OBPS”) for industrial facilities in Listed Provinces, which will enter into force in January 2019.

Part one of the GGPPA covers liquid fuels (e.g., gasoline), gaseous fuels (e.g. natural gas) and solid fuels (e.g. coal). When the carbon tax is applied in 2019, there will be a minimum carbon pollution price of $20 per tonne of carbon dioxide equivalent (“CO2e”) that will increase by $10 per tonne per year until it reaches $50 per tonne in 2022.

Emissions-intensive industrial facilities covered by the OBPS system will work under a separate regime; those classified as “covered facilities” will pay the carbon tax on the portion of the facility’s emissions which exceed the threshold for that particular industrial activity. Facilities that emit less than the applicable threshold will receive compliance units, or “surplus credits”,1 from the federal government that they can bank for future use.

Indirect Effects of the GGPPA on Quebec Industry

As it stands, Quebec’s cap-and-trade system meets the stringent federal requirements and continues to be considered “a leader in pricing carbon pollution in Canada”.2 As such, Quebec will not be directly subjected to the federal pricing system for the time being.

However, certain Quebec companies may have compliance and disclosure obligations. Within the fuel supply chain described in part one of the GGPPA, compliance obligations apply to each of: (i) registered distributors, such as fuel producers or large scale distributors; (ii) registered importers; (iii) registered users, such as facility operators or commercial transportation operators; and (iv) non-registered persons, such as retailers.

Therefore, anyone who wants to bring fuel out of or into a Listed Province will have to be registered as either a distributer or importer, according to the requirements of the GGPA. Generally, there will be a fee for fuel that is used in a Listed Province. In most cases the fee will be paid by the distributor, with exceptions if the person to whom a distributor is delivering the fuel in the Listed Province is excluded from the charge or if an exemption certificate is provided by said person. An example of a person excluded from the charge is another registered distributer or registered emitter. In such instances, there will not be a fee and the registered distributor will be able to deal in fuel with one another.3

Exemption certificates may be given by the person buying fuel. The exemption certificate will apply if the declaration made by the person carrying the exemption certificate is:

a registered distributor specific to the type of fuel being delivered;

a registered air, marine, or rail carrier specific to the type of fuel being delivered;

a registered emitter,4 and the fuel is used at their covered facility;

a registered user specific to the type of fuel being delivered and the fuel is being used for a “non-covered activity”5

a farmer, when the fuel is delivered to a farm, the fuel is used exclusively for operating certain farming machinery and all, or substantially all, of the fuel is used for farming activities;

a fisher, when the fuel is used exclusively in the operation of a certain fishing vessel and that all, or substantially all, of the fuel is used for fishing activities; or

a prescribed person, a person of a prescribed class, or a person meeting prescribed circumstances that are present.6

A person importing fuel into Canada and into a Listed Province, or a person bringing fuel into a Listed Province from another province will have to pay a fee unless they have been registered under a certain title (i.e. emitter) and deliver to a registered distributer, who will then pay the fee instead.7 There will generally not be a fee payable when fuel is imported or brought into a Listed Province temporarily and is en route to a destination outside of the Listed Province.8

There may also be additional charges required for registered users, such as commercial carriers, who use or purchase fuel in a Listed Province while there, although such charges are subject to a rebate upon their return, under certain conditions.

Penalties under the GGPA apply when a person tries to use an exemption certificate but is ineligible, in which case the recipient of the fuel will have to pay the original charge in respect to the delivery of fuel and a penalty equivalent to 25% of the amount of the original fuel charge. In addition, if the person knew, or should have known, that the declaration they were making to use the exemption certificate was false, both the recipient and the person delivering the fuel are jointly and severally, or solidarily, liable for the payment of the charge and the penalty, as well as any other related interest or penalties.9

In short, Quebec industry actors must be aware of the potential indirect implications that the GGPPA will have on their distribution activities and fuel consumption and prepare accordingly.